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Investors in shares are too bullish and ignoring the considerable downside risks in the market, says Investec fund manager Alastair Mundy, in a warning that is at odds with many upbeat forecasts for world equity markets this year.

Banks and market commentators have started the year almost unanimously optimistic on the outlook for shares with debate over whether a 'great rotation' has begun with investors selling bonds in order to buy equities. The FTSE 100 is up 5% so far in 2013.

But Mundy, who runs a total of eight funds totalling around £11 billion at Investec, is wary of the fact that many investors are more confident now than at the trough for most global equity markets in 2009.

The veteran fund manager, who is known for his contrarian views, told Citywire: ‘People appear to be more bullish now than 2009 even though there is far more downside risk now. We could see lots of stocks then, such as jeweller Signet and [housebuilder] Travis Perkins which have quadrupled since, and are much closer to fair value so we see far less upside than in 2009.’

Mundy, who also runs the Investec American fund alongside Mark Wynne-Jones, has taken his Japan exposure to 11%, buying a raft of names across the market cap spectrum while his US exposure has fallen to around 5% of the fund.

Japan too cheap to ignore

The Japanese equity weighting is at its highest ever level as Mundy believes the market is too cheap to ignore.

‘I find it amazing when the [Japanese] market is this cheap that people still don’t bother with it. At what point would they bite? Maybe never. It seems everyone is looking for an excuse not to.’

Mundy’s buys in Japan include regional banks, life insurers and global exporters such as Casio and Yamaha, many of which are still trading at around or below book value.

Conversely, he has taken his UK weighting close to its lowest level, while he has been recycling what he sees as historically expensive US equities into Japan and is looking for selective opportunities in core Europe.

Three years ago the fund had no Japan exposure and he has also been steadily decreasing his UK weighting, finding a number of better value opportunities elsewhere.

Despite the poor performance of listed gold over the past few months, Mundy is reassured that his five gold miners have been relatively anaemic performers as it shows his hedge against a failure of the global fiscal easing programme remains intact.

Gold hedge

Mundy owns Kinross, Barrick Gold, Newmont, Anglo Gold and Gold Fields, which together make up almost 6% of the portfolio.

‘Gold has been a poor performer and it is probably a mix of investors buying ETFs and gold companies wasting too much money on M&A and capex. ‘

‘Gold shares are now cheap compared to their Net Asset Value (NAV) and other equities. I don’t mind if they go down for the next five years because then they could go up again. They are also starting to grow a dividend culture.’

He is also mulling whether to buy platinum miners and despite the industrial and political unrest surrounding mining in South Africa, he is encouraged by the fact the metal's spot price should remain high as the country is its sole producer.

Mundy bought RBS last July, with insurer Direct Line and cruise operator Carnival his only other UK acquisitions he admits to being ‘far more choosy’ on the UK market.

He has watched RBS’s share price rise from £2 per share to close to £3.60 over the last six months.

‘We bought it because we think some bank franchises are very good at passing on costs to the consumer. We saw its downside as zero and a potential tripling of its upside. It has done a lot to turn itself into a better business and has cut its losses and raised a lot of capital.’

‘I can see a point where RBS gets back to its pre-eminent position in the mid 90s. We would probably sell when it reaches £4.20 to £4.50.’

Mundy has also been mulling greater exposure to Europe’s lowly valued market.

‘Valuations look very low on any metric and you can find good shares across the market. You will not find ultra-low prices at the same time as unbelievable stories but there are opportunities there.’

Since the launch of the Investec GSF Global Contrarian Equity in November 2011 the fund’s value approach has been somewhat out of favour as global markets have generally rallied, and the fund has returned 4.8% compared to the benchmark’s 12.3% over the year to 14 January.

Having read Mundy's bearish comments I am more confident in the forward progress of my portfolio.. His views on Japan investing have been made every year for the last 15 at least by him and other so called experts. In fact Japan has barely moved at all for many years - except sideways.

(Admittedly some of the top US & Global funds need larger than the average retail investor’s usual initial investment, but the best 2012 performing fund in all 3 sectors is an easily accessible fund managed by Standard Life’s AA rated Edward Legget).

Even the Investec Cautious Managed Fund recommended in this blog by Citywire didn’t attain top quartile in 2012 (5/12) although returning a respectable 12.73%. The top fund produced double that with a lower risk factor.

Maybe its worth taking Alastair’s warnings and advice about 2013 into consideration and of course its good to heed the warning not to get carried away with the mood of the moment. We’ll know this time next year whether Japan, Gold, and US Stocks are set to outperform other assets but based on the above 2012 performance, I think I’ll get a second opinion on the year ahead!

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